New laws, roads & impressions pave the way for logistics
N. Shridhar, Group Director and CEO of infrastructure at Green Base, talks about the quickly growing logistics sector in India. Green Base, formed by the Hiranandani group, commits to providing logistics and industrial parks in wake of India’s burgeoning demand.
How is India currently responding to its huge successes in the logistics sector?
If you compare the logistics cost between countries especially, it ranges from 8-9% of GDP in developed countries like the US and Europe, compared to around 15 % of GDP for a country like India. Thus, even a couple of percentage changes due to savings/optimisation for us in India, will lead to changes in the market place and lead to a direct impact on the GDP.
In the Indian context, with many initiatives being taken like the Bharatmala on the highway infrastructure development, GST reforms and the “Make in India” Initiative, the focus has shifted to delivering high quality grade A Logistics & Warehousing assets to delight customers and optimise the cost efficiencies.
The Indian National Highway Authority is currently building miles and miles of road every day to connect all of our villages, towns and cities. So not only does it bring balance to the regional economy, but it also brings moral value and monetary value as well. This also allows us to move, store, and connect our entire supply chain which makes it cheaper for us and contributes even more to the GDP.
What are the main challenges the sector is facing at the moment?
That’s a good question, because the growth in the sector itself is purely to meet the requirements of the country right now.
One challenge it faces at the moment is the land. Any project which has the cost of land at >25% the overall project cost will not be efficient, which is a problem because this asset class uses much more land than offices, for instance. So land cost efficiency is a huge challenge that must be tackled for a lucrative logistic opportunity. The expensive land can also be nullified by optimisation and value-add in terms of additional amenities /facilities for customers to help increase the margins.
Another challenge could be the availability of investors. Grade A office space is way more attractive at the moment. But this is less of a challenge and more of a perception that needs changing, which it is as logistics gets more popular. Industrial & warehousing assets are more sticky by nature & can be a good yield asset for investment.
The cost of constructing a good quality Grade A warehouse structure varies between INR 12,917–INR 19,375 per sq m (INR 1,200–1,800 per sq ft) depending on the state of the land. The cost of land in India varies by a huge margin depending on the location and quality of infrastructure near the land parcel. If we consider the cost of construction (including the cost of land) for a warehouse in India, it will be unlikely to exceed INR 26,910 per sq m (INR 2,500 per sq ft). 83% of the USD 6.8 bn invested into warehousing is committed for new development. Thus, the investments committed by the institutional investors alone is estimated to create over 15 mn sq m or 158 mn sq ft of new warehousing space.
With the launch of the Embassy/Blackstone REIT, some suggest Logistics could be the next asset class to get a REIT, how likely do you think that is?
The REIT regulations in India have absolutely come a long way - the current state of REIT has been something that we’ve been working towards for the last 3-4 years. I believe the work had actually culminated in the InvIT a while before the Embassy-Blackstone REIT came into the picture. I can definitely see there being more REITs to follow.
I think good office assets, backed by good developers and good management will attract the most investor appetite, because it’s perhaps the most established in India.
Having said that, it’s important to say the next best asset class in terms of stickiness is industry, warehousing, and logistics, which is quickly picking up.
What impact do you think the new budget and relevant will have on the sector?
Legislation and the new budget in particular has already impacted the market and set it up for significant development. New roadways and highways commissioned that are now spanning across all parts of the country are eliminating a lot of the regional imbalances that often made nationwide business difficult. This free movement of goods, also helped by the new GST regulations that eases tax on movement between states will bring a great deal of regional stability.
Also the digital communication framework that has been developed from the enlarged technology budget, as well as the new bankruptcy code, has positively contributed towards the sector.
While stressing on the subject of skill development through Pradhan Mantri Kaushal Vikas Yojana, Nirmala Sitharaman said that the government would also focus on “new-age skills like artificial intelligence, internet, 3D printing, virtual reality and robotics that offer much higher remuneration. These skills are important for the logistics industry to transform the end-to-end movement and tracking of goods.
Following are the key takeaways from the current environment / policy:
- Creating a single point of reference Driving logistics cost as a % of GDP down from 13% to 10% by optimising current modal mix and improving first mile and last mile connectivity
- Increased digitization and technology adoption; ensuring standardization in logistics
- Creating a National Logistics e-marketplace
- Improve India’s ranking in the Logistics Performance Index to between 25 - 30
For further reading into the current state of warehousing in India, here is a previous relevant article
For more discussion on the current state of Indian real estate, India GRI 2019 is taking place on the 18-19 September in Mumbai.
Article by Matt Harris